UK CEO pay cut exposes compensation guesswork

LONDON (Reuters Breakingviews) - A pay cut for Britain’s top corporate leaders shows how setting compensation for chief executives is more of an exercise in guesswork than an exact science. The average CEO of a FTSE 100 company took home 17 percent less last year despite buoyant markets. Cutting their remuneration assuages public opinion but also underscores the problems companies face when trying to link pay with boardroom performance.

Martin Sorrell, Chairman and Chief Executive Officer of WPP, attend The Times CEO summit in London, Britain June 28, 2016

There is no need to feel sorry for corporate titans just yet. The average boss of a FTSE 100 company pocketed 4.5 million pounds in 2016, although this was down from 5.4 million pounds in the previous year, according to a report by the Chartered Institute of Personnel and Development and High Pay Centre. The average also masks some big swings. WPP Chief Executive Martin Sorrell saw his pay drop by almost a third to 48.1 million pounds after a series of bruising revolts by investors in the marketing and advertising giant. Meanwhile, many executives at the bottom end of the range received a pay rise.

Even so, the average decline is hard to link to performance. Average earnings per share at FTSE 100 companies were down just 2.1 percent last year, according to Reuters data. Meanwhile, average pay for chief executives of companies in the S&P 500 index increased last year by 8.5 percent to $13.1 million, according to a survey by recruitment analyst Equilar and the Associated Press.

Public outrage may partly explain the shift. Despite the pay cut, chief executives of FTSE 100 companies still took home 129 times more than their average employee. The gap between rich and poor in the workplace is unwanted publicity for many companies – especially when British wages are failing to keep pace with rising inflation.

Meanwhile, CEOs also benefit from rising stock markets, which lift the value of their share-based compensation. Linking executive pay to actual performance remains as much of a challenge as ever.

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